Answered Essay: Monro e Manufacturing owns a warehouse that has been used for storing finished goods for

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3. (2.5pts) Monroe Manufacturing owns a warehouse thathasbeen used for storing finished goods for electro-pump products. As the companyisphasing out the electro-pumpproduct line, the company is considering modifyingthe existing structure to use for manufacturing a newproduct line. Monroesproduct engineer feels thatthe warehouse couldbemodified to handle one oftwo new roduct lines. The cost andrevenue data for the two product altematives are as follows Product A Product B Initial Expenditure $115,000 $250,000 $215,000 $126,000 $189,000 $315,000 $289.000 S$168,000 Warehouse Modification Equipment Annual Revenues Annual Operating & Maintenance cost Productlife 8 years 8 years Salvage value $35,000 After eight years, the converted building will be too small for efficient production of either product line. At that time, Monroeplans to use it as a warehouse for storing raw materials as before. Monroes MARR is 15%. Compute the Net present worth for eachproduct. Which product 4. (2.5pts) A diesel manufactureris considering the two altemative productionmachines given the data below: TheMAAR for the firm is 9%, calculate the present worth for each altemative for 10year analysis period. Which altemative shouldbeaccepted? Altemative 2 $75,000 $12,000 em Altemative 1 Initial cost $50,000 Estimated Salvage Value at $10,000 the end ofusefullife Usefullife ofequipment (yrs.)7 13 $15,000 AC Estimated Market value at the $20,000 end oftenyears analysis period

Monro e Manufacturing owns a warehouse that has been used for storing finished goods for electro-pump products. As the company is phasing out the electro-pump product line, the company is considering modifying the existing structure to use for manufacturing a new product line. Monroe’s product engineer feels that the warehouse could be modified to handle one of two new product lines. The cost and revenue data for the two product alternatives are as follows: After eight years, the converted building will be too small for efficient production of either product line. At that time, Monroe plans to use it as a warehouse for storing raw materials as before. Monroe’s MARR is 15%. Compute the Net present worth for each product. Which product should be manufactured? A diesel manufacturer is considering the two alternative production machines given the data below: TheMAAR for the firm is 8%, calculate the present worth for each alternative for 10 year analysis period. Which alternative should be accepted?

Expert Answer

In the problem both alternatives have different useful life. So has to compare the benefits, the purchase related to lesser useful life alternative is repeated. Then comparison is done based on market value for certain period common to both.

Alternative 1

(Shorter life span)

Alternative 2
Initial Cost C1 = -$50,000 C2 = -$75,000
Useful life p1 = 7 p2 = 13
Salvage value S1 = $10,000 S2 = $12,000
Replacement Cost R1 = -$50,000 (Not required to repeat purchase)
Terminal Value at the end of 10th period T1 = $20,000 T2 = $15,000
Present worth of costs with 10-year analysis period PW = C1 + (S1 + R1)(P/F, 8%, p1) + T1(P/F, 8%, 10) PW = C2 + T2(P/F, 8%, 10)

PW1 = (-50,000) + (10,000 +(– 50,000))(P/F, 8%, 7) + (20,000)( P/F, 8%, 10)

PW1 = (-50,000) + (10,000 – 50,000)(0.5835) + (20,000)(0.4632)

PW1 = – $64,076

PW2 = (-75,000) + (15,000)( P/F, 8%, 10)

PW2 = (-75,000) +(15,000)(0.4632)

PW2 = – $69,442

PW1 < PW2, alternative 1 minimizes the PW costs, thus select alternative 1

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